6/22/2009 @ 5:00PM

Madoff's Little Helpers

Bernard Madoff hid his $65 billion Ponzi scheme from meddlesome outsiders with the help of friends at a broker-dealer he partly owned and with which he shared office space with in Midtown Manhattan, according to securities regulators.

The Securities and Exchange Commission filed civil fraud charges on Monday against that firm, Cohmad Securities, as well as Cohmad principals Maurice Cohn, Marcia Cohn and Robert Jaffe and a Los Angeles-based broker, Stanley Chais.

Cohmad and the individuals named ignored or participated in suspicious practices that clearly indicated Madoff was running a fraud, the SEC contends in two suits, filed in federal court in Manhattan. Chais was charged separately.

Jaffe, a broker to the rich and fabulous, brought in $1 billion to Madoff over the years and happens to be the son-in-law of one of Madoff’s earliest investors, Carl Shapiro, who lost hundreds of millions. Once the debonair toast of Palm Beach society, Jaffe has come to be seen as a central villain in the unfolding scandal.

The SEC says Jaffe asserted his Fifth Amendment rights against self-incrimination related to some questions in its investigation of him. Jaffe, who got outsized returns in his Madoff accounts (46% annually vs. 12% for regular investors) and withdrew $150 million from those accounts over the years, was aware that Madoff created false paperwork and engaged in fictitious trading by backdating tickets and creating fake confirmations, the SEC contends.

It was through people like Jaffe and Chais that Madoff was able to drum up new money to support his Ponzi scheme while appearing to be above the fray, the SEC says. “Madoff cultivated an air of exclusivity by pretending that he was too successful to trouble himself with marketing to new investors,” said Robert Khuzami, the SEC’s director of enforcement.

“In fact, he needed a constant inflow of funds to sustain his fraud, and used his secret control of Cohmad to obtain them,” Khuzami said.

Stanley S. Arkin, Howard J. Kaplan and Peter B. Pope, attorneys at Arkin Kaplan Rice LLP who are representing Jaffe, said, “The complaint filed today by the Securities and Exchange Commission, which we learned about only from the press, smacks of impulsiveness and efforts at self-justification. It is unfair, baseless in the law, and is inaccurate in its understanding of the facts and of Mr. Jaffe.”

As for Chais, the SEC’s charges are similarly damning. He and his family withdrew half a billion dollars more than they put in with Madoff over the years while thousands of others were wiped out, the SEC says.

The Los Angeles broker, who invested $1 billion with Madoff through three funds, ignored red flags that Madoff was issuing false statements and used those statements as the basis of information he mailed to his own clients, according to the suit.

Chais spent 40 years holding himself out as “an investing wizard, purporting to execute a complex trading strategy on behalf of hundreds of investors, despite in actuality being an unsophisticated investor who did nothing more than turn all of those investors’ assets over to Bernard Madoff,” the lawsuit says. His lawyer wasn’t immediately available.

Chais’ attorney said the charges were groundless. “Like so many others, Mr. Chais was blindsided and victimized by Bernard Madoff’s unprecedented and pervasive fraud. Mr. Chais and his family have lost virtually everything–an impossible result were he involved in the underlying fraud,” Eugene Licker of Loeb & Loeb LLP said in a statement.

The Cohns and Cohmad filed false forms concealing their primary activity, which was to bring in business for Madoff, the suit says. They also got paid commissions only for money they brought to Madoff–and they lost those commissions when customers withdrew more money than they had originally deposited, an incentive to make sure no customers withdrew money from Madoff accounts.

Their attorneys were not immediately available.

The referral business generated 90% of Cohmad’s revenues from 1996 to 2008, the SEC says, earning $98 million in fees paid by Bernard Madoff Investment Securities.

Madoff, 71, faces 150 years in prison after pleading guilty in March to orchestrating the massive swindle, which spanned decades. He is scheduled to be sentenced in Manhattan on June 29. In pleading guilty to 11 counts, Madoff has tried to assert he acted alone, though many wonder how he could have pulled off so large a fraud for so long without detection.

Thousands of individuals ranging from Hollywood celebrities to ordinary retirees lost billions when the fraud collapsed in December after Madoff could no longer keep up with heavy redemptions and confessed to his sons, who turned him in.

The SEC says Cohmad and the Madoff firms were so intermingled it made it confusing for regulators and outsiders to assess the true nature of their interactions. Madoff owned 15% of Cohmad but was viewed by Cohmad’s employees as “the boss,” the SEC says. They shared offices, equipment and staff.

Madoff is portrayed as being sensitive to tipping off outsiders. He directed Cohmad employees to operate secretively. He barred them from using e-mail after 2006, the year he finally registered his own advisory business after avoiding it for decades. He told Cohmad employees not to refer any clients with finance backgrounds because they would “ask too many questions.”

Instead the brokers went after affluent but financially unsophisticated investors, the type who would be lured by the glamour of Madoff’s seeming exclusivity and who wouldn’t notice or ask about some of the inconsistencies that seem so glaring now.